Food & Beverage

California drought and wine: Cheaper products hit hardest

Anita Balakrishnan, Special to CNBC

A vicious, four-year drought may be close to catching up with California's winemakers, and it's the small producers of inexpensive wine that are likely to be hit hardest.

The California drought has left some vineyards with a fraction of their usual water allotment. State Water Project allocations hover around 20 percent of normal, while the San Joaquin Valley irrigation districts are delivering no more than 30-35 percent of normal supplies, according to Jay Lund, professor and blogger for the University of California-Davis Center for Watershed Sciences.

A winery's vineyard irrigation system provides moisture to grapevines on March 17, 2015, near Los Alamos, California.
George Rose | Getty Images

For the first nine months of 2014, shipments of wines below $7 per bottle slid 2 to 3 percent, while more expensive wines saw double-digit growth, according to a 2015 industry update by the Allied Grape Growers, a California-based trade organization.

"The American consumer of wine is trending his or her wine buying to $10 and above, and that is great for many winery brands," President Nat DiBuduo wrote in the report. "The challenge again this year will be wines selling at $7 and below, as that price segment is retracting in volume. That market and those growers may face another difficult year in 2015."

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The quality may be dropping soon—you want to buy (good vintages) and have them for a couple of years. They may disappear someday. You want to have them before that.
Keith Wallace
founder, Wine School of Philadelphia

So far through the current drought, as thirstier crops have withered, hardy grapevines have continued to flourish. Experts like Wallace, however, say a tipping point might be coming. An increasingly crowded beverage marketplace was already pressuring California vintners to reduce prices, said Keith Wallace, founder of the Wine School of Philadelphia, an institution that trains winemakers, sommeliers, importers and other industry professionals.

Meanwhile, the drought is pushing up costs for producers. To keep prices attractive, winemakers have cut costs or faced losing their customers to foreign wines or craft beers.

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High-end producers in Napa Valley can accept lower grape yields in exchange for better flavors, but the same is not true for wineries that make cheaper wine and sell grapes by the pound. While people typically think of cheap wine producers as being big firms, many of the largest producers actually buy their grapes from small, independent farmers in the San Joaquin Valley.

W. Blake Gray, the California editor of online publication Wine-Searcher, has watched the wine market change over his career. He said that the up-and-coming generation of wine drinkers—people in their 20s with their first full-time job—now have alternatives to cheap wine, such as craft beer or sake, to pair with fine dining.

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"People like me, we write about these pampered grapes that go into expensive wines," Gray said. "But introductory wine is machine-harvested and really cheap. The fine wine market is thriving. Cider is booming. Sake is booming. But these are all competitors to cheap wine."

'They will shut down to save themselves'

Compared with most other crops, grapes are drought-tolerant. But they aren't invincible. Wallace and Gray said extended periods of high stress can cause vines to stop producing fruit eventually. And while older, established grapevines can burrow 100 feet into the soil to look for water sources, without rain to flush the soil regularly, salt can build up and poison the plants.

"They will shut down and save themselves, and stop producing fruit to save energy," Gray said. "It's not like the San Joaquin Valley will shut down overnight. But we will need a torrential downpour for a couple years in a row. In the same sense the vines didn't didn't immediately shut down, they aren't going to immediately jump and recover."

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For consumers, that may mean it's a good idea to get hold of the good vintages while they're still around.

"The quality may be dropping soon; you want to buy them and have them for a couple of years," Wallace said. "They may disappear someday. You want to have them before that."

That said, Gray has written that California wine is a "tale of two markets" while the low-priced end of the market faces potential failures from the drought, the high end of the market is flourishing on the unique flavor of drought vintages.

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All the gloomy forecasts aside, droughts and warmer weather actually have some upside for wine harvests, at least in the short term. The warmer the region is, the earlier the fruit ripens. And across California, it's getting warmer sooner, affecting the skins and sugar content of the grapes, and ultimately, the flavor of the wine.

"The New World-style of wine tends to be bigger, heavier, fruit forward, higher in alcohol, " Wallace said. "Each winery and region has its own style. But New World wines have a fuller body. You notice the fruit first."

During dry periods, high-end wines are more flavorful, Wallace said, because the vines produce concentrated, small berries with thick skins. Wallace cites producers in Santa Ynez Valley and Howell Mountain as some of the most sought-after flavors of the past few years.

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People try to grow vines like lush green, flower-box plants. There is a certain level of tolerance that the plant can live with without affecting its activity. You can cut about 40 percent of water from vineyards.
Thibaut Scholasch
founder, Fruition Sciences

In fact, consumption of wine is growing within the U.S. and expected to stay that way. The International Wine and Spirits Record said, for example, that the demand for U.S. still light wine has increased 2.87 percent since 2008 and will continue at that pace through 2019—while Spanish, French and Italian wines either experience declines or show anemic growth.

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Former Mondavi winemaker Thibaut Scholasch is founder of Fruition Sciences, a firm that helps farmers take advantage of the sweet fruits produced by dry farming, using sensors, drones and data analysis to prevent stress to the plants. He said that vineyard operators need to rethink how they assess whether vines are "dry" or not.

"People try to grow vines like lush green, flower-box plants," Scholasch said. "There is a certain level of tolerance that the plant can live with without affecting its activity. You can cut about 40 percent of water from vineyards. We are trying to untrain people from relying on what they see with their eyes."

Fruition Science's sensors measure real-time behavior of plants to make sure they are adapting to the amount of water instead of watering when plants "look" dry.

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But not everyone agrees that technology will be enough to save the day.

"Nobody wants to say, 'We are suffering,' because that's really bad for business. No one wants to say their investment is dying," Wallace said. "Now we are in that point where we will start hearing about it. At the end of the day, the vines need water, and you have to get it to them somehow."